Economics of an Ann Arbor Conference Center I

As noted earlier, the notion of building a conference center on the Library Lot appears to be live and well. With the city bringing on a consultant, and with the two proposers (Valiant and Acquest) suggesting studies, it appears that the discussion will hinge to a large extent around the viability of a conference center/hotel as a business venture. Since under most scenarios, return on an investment by the city would hinge on whether a conference center would pay off in increased business for the hotel and the area’s economy, it is worth examining what we can determine about its likely success.

The posts will be as follows:

I. What is the demonstrated need?
II. What is the experience of other cities with subsidized conference centers?
III. What is the likely effect on the area’s economy?

These posts are slightly edited sections of a white paper prepared by a committee of the citizens’ group, Public Land – Public Process (see statement of principles on the group’s blog). The authors are Vivienne Armentrout, Nancy Kaplan, Eric Lipson, and Leslie Morris.

I. Demonstrated need

It has been asserted by supporters of building a conference center that “many” people believe that there is a need. There is no current market study available that addresses the need for additional hotel and conference capacity in Ann Arbor and Washtenaw County, though both Valiant and Acquest have cited the need for a study, and Valiant has indicated that they are contracting for one. The only information that we have at present is about the current capacity and its usage.

According to Mary Kerr of the Convention and Visitors Bureau (CVB), Washtenaw County has 4,000 hotel rooms, including bed and breakfast-type lodgings. The Ypsilanti Marriott, where many events have been held, is 238 rooms. The occupancy information that the CVB collects is considered confidential and is released only to its members. The other major source of occupancy data is Smith Travel Research, a subscriber-based service whose reports are also confidential and not available to the general public. Kerr was able to summarize STR’s latest report as indicating that “Ann Arbor’s year-to-date occupancy (through November) was 60.2%, down 7.3% from the same period in 2008 which was 65%… Ann Arbor’s occupancy rate is the highest in the State of Michigan.”

Another important measure of hotel profitability is average daily rate (ADR). This fluctuates from month to month, with seasonal and competitive differences. According to Kerr, ADR in 2009 was down 5% (Jan. – Nov.).

Charles (Chuck) Skelton, president of Hospitality Advisors Group of Ann Arbor, is considered to be an authority on the hotel business nationwide and is very familiar with the situation in Ann Arbor. He has recently given several interviews, including one with Councilmember Sabra Briere (January 14, 2010) and one with Leslie Morris (January 24, 2010: see here). In the Briere interview, he stated that Ann Arbor hotel occupancy was in the low 60% range and that ADR is around $99. He also said that full-service hotels need to have occupancy in the 60-65% range in order to break even. A copy of the CVB report (obtained informally) appears to bear that out. It shows 2009 full-service hotel occupancy at an average of 63% and the ADR as $102. But limited service hotels had an average occupancy of 52% and the ADR for 2009 at $90. For the month of December, both occupancy (46%/35%) and ADR ($89/$81) dropped for both classes.

The numbers may even be worse for some area hotels. Michael Harman, General Manager of the Campus Inn (the major downtown hotel at present), in a comment to an AnnArbor.com story about the conference center proposals, stated that the Campus Inn’s occupancy “hovers around 50%” year to year.

But the proposals now before the City are apparently based on much higher occupancy and room rates. The Valiant proposal assumes an occupancy of 73% in the second year, rising to 80% by the fifth year. It assumes an ADR of $193 in the second year, rising to $221 by the fifth. The Acquest proposal does not break out expectations in that manner, as they expect to be both the developer and the manager of the hotel. (The Valiant proposal bases payments to the City on hotel revenues so presents occupancy returns as part of their cost proposal.)

Briere’s notes on her meeting with Skelton contain his account of a meeting with Fritz Seyferth and Bruce Zenkel of the Valiant group a year ago, when they asked him to look at a proposal for a bigger facility than that finally proposed. It contains an amusing error of assumption that they made.

“Chuck informed them that market conditions nationally were bad and Michigan was the worst market in the country. At that time, full service hotels (those with restaurants and meeting space) in Ann Arbor were performing in the low 60% occupancy range (he advised us that at year end ’09 they had deteriorated to 55%) and that those in the downtown area were performing below that level… He also related that the historical growth in the full service segment in Ann Arbor was about ½% per year over the past seven years. He also relayed that average rates for hotels in Ann Arbor had grown at only about 1 ½% per year over that same period and that currently full service rates are around $99. These factors have eroded hotel values. Needless to say the hotel developers were surprised and stated that it was always difficult to get rooms when they came into town and that rates were always above $200 at the Campus Inn. When asked when it was that they came to town they admitted it was typically during football season and graduation. Chuck stated that those were the exceptions and from November through March one could find significantly lower rates.”

Skelton, as relayed through his interviewers, makes another point about the viability of new conference center space: the increasing use of videoconferencing as a replacement for in-person meetings. A recent (February 1, 2010) article by Joe Sharkey in the New York Times highlights this movement by interviewing the originator of a new virtual conferencing website, Expos2. The company’s website, which is subtitled “Real is so yesterday”, says: “The world has moved to virtual events in a big way. The reasons seem pretty clear. First you can save up to 90% of the event budget compared to a physical event.” The site allows conference participants to navigate from event to event, with live interaction. Sharkey says that in 2007, meetings accounted for about 44% of business travel, but the industry is now in a sharp slump. Indeed, a recent story in the Detroit Free Press says that “Total hotel revenues in the metro Detroit market plunged 19.3% last year to $578 million, down from $716 million in 2008, according to Smith Travel Research. Average occupancy fell from 55% to 48% last year”; a number of top hotels in the area are in financial trouble, including the prestigious Hyatt Regency Dearborn, “a premier conference and convention hotel”.

A key question in demand for conferencing facilities in Ann Arbor is the possible role of the University of Michigan, both in driving demand and in filling it. In response to a query from Nancy Kaplan, Jim Kosteva, the director of community relations for the UM, indicated that the UM takes no position on any possible proposal for a conference center and will not speculate on what use UM departments might make of any new facility. For an event hosting 2000 in the summer of 2009, organizers had no trouble finding hotel rooms and made creative use of spaces in the Michigan Union, the Michigan League, Hill Auditorium, etc., and with 4000 hotel rooms there were no housing problems.

The UM itself has many facilities that are actively managed for conferences. As they say on their Conference Services page, “The University of Michigan is one of the largest universities in the world in terms of building space. With more than 20 million square feet of space in our classrooms, auditoria, sport and performance venues, we are sure to have the space you need to host a successful program.” They mention, for example, the Rackham Building, with its large lecture hall (1,100 seats) and auditorium (240 seats) plus a variety of meeting rooms, and a number of smaller facilities like the University League and Palmer Commons that can accommodate 220 to 600 people. Although Kosteva discounted the possible use of the newly acquired former Pfizer facility, now called the North Campus Research Complex, a video points out that it has a 700 seat cafeteria, conference rooms with state of the art audiovisual features, an auditorium, many conference rooms and offices, as well as multiple coffee bars, a fitness center, and shopping and retail across Plymouth Road, and is served by campus and city buses. The NCRC website also has slideshows of the facilities, including one on extensive meeting room and conference capabilities. Of course the Plymouth Road/Green area also has hotels. It is clearly ideal for conference use, especially if it attracts the high-technology clients that are clearly anticipated.

UPDATE: The NCRC’s potential for serving as a community meeting place is illustrated by the Ann Arbor Art Center’s Winefest celebration to be held in the former Pfizer cafeteria, as reported by AnnArbor.com.

SECOND UPDATE : Another example of conference space already available in Ann Arbor and apparently underutilized was reported by AnnArbor.com. The Michigan Information Technology Center is dissolving and apparently leaving vacant its conference facility, though other parts of its building (South State Commons II) are apparently still occupied. The building at 1000 East Oakbrook had sophisticated conference capabilities, including videoconferencing throughout. Yet as the landlord, MAV Development states in its listing, “The immediate area features ample lodging, dining, shopping, and offices.” (And, one might add, there is plenty of parking.)

THIRD UPDATE: A new article discussing the importance of convention centers to communities includes several notable quotes, including this one: “Most convention centers are removed from their communities by virtue of becoming developments that are about drawing people into the city, not about being integrated in the city culture and fabric.”